Chapter 6 Learnsmart b*tch are you dumb or are you dumb
Which of the following are real-world examples of annuities
mortgages pensions
Original loan amount
principal
A credit card charges 18% APR or 1.5% each month- what is the EAR
19.56%
The general formula for ____ is (1 + quoted rate / m) ^m - 1
EAR
Which compounding interval will result in the lowest future value assuming everything else is held constant?
annual
Assume interest is compounded monthly. The ___ annual rate will express this rate as though it were compounded annually
effective
The difference between the present value of an ordinary annuity with payments of $100 per year at 10% compounded annually for 10 years and an annuity due with payments of %100 per year at 10% compounded annually for 10 years is:
$61.45 The difference is PV(annuity due - PV(ordinary annuity), or $675.90-$614.46=61.45
what are two ways to calculate a balloon payment?
-Amortize the loan over the loan life to find the ending balance -Find the present value of the payments remaining after the loan term
An APR with continuous compounding gives an EAR of
9.42%
Which of the following is the simplest form of a loan
A pure discount loan
The formula for the present value interest factor of an annuity is:[1- 1/(1+r)τ]/r.
True
An annuity due in a series of payments that are made
at the beginning of each period
a lump sum payment to pay off balance of a partially amortized loan is called a ______ payment
balloon or bullet
what type of amortization is most commonly used in the real world for mortgages and car loans
fixed payment
Find future val of 100 annuity per year at 10 percent in 10 years
future val factor= (1.1^10 -1)/0.1= 15.93 15.93*100=1593.74
A single cash flow is also known as a:
lump sum
Another common name for effective annual rate is the annual percentage ----
yield
The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $200 and the third at end of year 3 is $300. Cash flow pattern is:
uneven
Interest paid twice a year is known as _____ compounding.
semi-annual
my took out a mortgage of $100,000 at 4.5% with monthly payments for 30 years. Payment is 506.69 per month. In the first month, how much principal will she repay?
131.69 Interest is 100000* 0.045/12= 375 506.69-375=131.69
Suppose you paid a $1,200 loan off by paying $400 in principal each year plus 10% yearly interest. How much is the second interest payment?
80 1200-400 x 0.1
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1+ r).
ordinary
which of the following processes can be used to calculate fv for multiple cash flows
compound the accumulated balance forward on year at a time-calculate the future value of each cash flow first and then add them up
The EAR takes into account the ______ of interest that occurs within a year
compounding
Which of the following payment methods amortizes a loan?
-fixed payments that result in zero loan balance - interest plus fixed amount
If C=100, g=10%, r=15%, and t=2, what is PV of growing annuity?
100* [[{1- [(1.1/1.5)^2]}/1.05]] 170.13
$100 at the end of each year at 10% each year is worth how much today
100/0.1
To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables look up the present value factor which is _______ and multiply that by ______
3.7908; 1000
You will receive a bonus of $5000 in one year's time and would like to take a loan against it now, How much can you plan to borrow if you use the entire amount to pay back the loan and the interest is 3%
5k/1.03=4854.37
when calculating the pv of multiple cash flows using a spreadsheet you must
calculate the pv of each cash flow then add the discounted values together
In the excel setup of a loan amortization problem, which of the following occurs?
-payment found using PMT(rate,nper,-pv,fv) -to find the principal payment each month, you subtract the interest payment from the total payment
which of the following are true about fixed payment loans?
-principal amount increase each period -interest amount decreases each period
A 5 year 10000 loan with a 15 year amortization period requires monthly payments at 10 percent interest compounded monthly
107.46 WTF ASK HOFFMAN
Assume a 100 investment earns a stated interest rate of 10 percent, compounded monthly. What will be the investment value after one year?
110.47 100 x [1+(0.1/12)]^12
If the interest rate is 10 percent per week, what is EAR? Assume 52 weeks in a year- it is a weekly rate (quoted rate/m)
14104%
use a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%
1537.25
What is the future value of an annuity due $100 per year for 10 years at 10% per year
1753.12???? 100 * (1.10^10-1)/0.1*0.1
What is PV of ordinary annuity that pays 100 per year for three years if r is 10% per year
248.69 100/1.1 + 100/[1.1]^2 + 100/[1.1]^3
Ralph has $1000 in an account that pays 10% per year. Ralph wants to give his money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?
402.11 1000= C x [1-(1/1.1)^3/0.1]
You are planning to buy a CD for $1,352. You will receive $1500 in 2 years. Use a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding.
5.33%
Find the future value of an annuity of 400 for 10 years at 5%
5031.16??/?/
Amy took out a mortgage of 100,000 at 4.5% with monthly payments for 30 years- what is her monthly payments to principal and interest each month
506.69???? ASK HOFFMAN
you borrow 100 and agree to pay back your payday loan in 2 weeks. the IR is 10 percent for the 2 week period. What is APR?
52/2*.10 = 2.6% per 2 week period 2.6*$100=260.71%
The annuity present value factor for 30 years and 10 percent per year is
9.4269 [1-(1.1^-30)]/0.1
You're funding an account that will pay your descendants the inflation adjusted equivalent of $100 per year forever. You assume inflation will be 3% per year, and you expect the account to earn 7% per year. How much do you need to put in the bank today to ensure your gift will continue forever?
PV= C/(r-g) =100/4% 2500
The spreadsheet formula for calculating PV of 100 at the end of each year for 2 years at 10% is PV(0.1,2,-100,0)
True
Which of the following should be valued using a perpetuity formula?
a consol, a preferred stock, cash flows from a product whose sales are expected to remain constant forever
payday loans allow you to
borrow now and repay later
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _______ of each period
end
How frequently does continuous compounding occur
every instant
If the interest rate is greater than zero, the value of an annuity is always ______ an ordinary annuity
greater than
What is true about a growing annuity
grows at a constant rate for a finite period
Given the same APR, more frequent compounding results in ______
higher EARs
A perpetuity is a constant stream of cash flows for an ------- period of time
infinite
For a positive stated annual interest rate and multiple compounding periods per year, the EAR is always _____ the APR.
larger than
Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is
less paying more and more of the principal earlier so less interest
Most investments involve:
multiple cash flows
The payments in a ______ amortization loan are NOT based on the life of the loan.
partial
the loan on partial amortization declines so slowly because the
payments are mostly interest
C/r is the formula for the present value of a(n) _______.
perpetuity
Amortization. is the process of paying off loans by reducing the
principal
Repay 1000 loan in 5 days with 50 interest- what is EAR
r= (1050/1000) - 1= 0.05 EAR= [(1.05)^(365/5)]-1 3422.24%
When interest-only loans that are not perpetuities, the entire principal is
repaid at some point in the future
The effective annual rate of 7.12% is equal to 7% compounded
semiannually (1+0.07/4)^4=7.12%
Because of ___ and ___, interest rates are often quoted in many different ways
tradition; legislation